IRC Sec. 401(c)(2)

This subsection, also unaffected by recent pension reform legislation, defines "earned income" for self-employed business owners (sole proprietors and partners) for purposes of applying various qualified plan limitations including the plan-wide deduction limitations under IRC Sec. 404 and the individual allocation limitations under IRC Sec. 415.

IRC Sec. 401(c)(2)

(2) Earned income

(A) In general
The term ''earned income'' means the net earnings from self-employment (as defined in section 1402(a)), but such net earnings shall be determined -

(i) only with respect to a trade or business in which personal services of the taxpayer are a material income-producing factor,

(ii) without regard to paragraphs (4) and (5) of section 1402(c),

(iii) in the case of any individual who is treated as an employee under sections [2] 3121(d)(3)(A), (C), or () in the case of any individual who is treated as an [2] So in original. Probably should be ''section''.

(iv) without regard to items which are not included in gross income for purposes of this chapter, and the deductions properly allocable to or chargeable against such items,

(v) with regard to the deductions allowed by section 404 to the taxpayer, and

(vi) with regard to the deduction allowed to the taxpayer by section 164(f).
For purposes of this subparagraph, section 1402, as in effect for a taxable year ending on December 31, 1962, shall be treated as having been in effect for all taxable years ending before such date.

(B) Repealed)

(C) Income from disposition of certain property
For purposes of this section, the term ''earned income'' includes gains (other than any gain which is treated under any provision of this chapter as gain from the sale or exchange of a capital asset) and net earnings derived from the sale or other disposition of, the transfer of any interest in, or the licensing of the use of property (other than good will) by an individual whose personal efforts created such property.

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